IMF Executive Board Completes Third Review Under the Policy Support Instrument for Cape Verde

The Executive Board of the International Monetary Fund (IMF) today completed the third review under a three-year Policy Support Instrument (PSI) for Cape Verde. The PSI was approved on July 31, 2006 (see Press Release No. 06/172).

Cape Verde's PSI is designed to enhance the sustainability of growth and development by maintaining a stable macroeconomic environment and moving forward with structural reforms. It is also expected to help the country reduce macroeconomic risks, provide a margin for safety against shocks, and prepare for a possible longer-term decline in access to concessional external financing. Key measures are directed to reducing public debt, building up international reserves, improving public financial management, and strengthening financial sector and energy sector regulation.

The IMF's framework for PSIs is designed for low-income countries (and small island states) that may not need, or want, IMF financial assistance, but still seek IMF advice, monitoring and endorsement of their policies. PSIs are voluntary and demand driven. PSI-supported programs are based on country-owned poverty reduction strategies adopted in a participatory process involving civil society and development partners and articulated in a Poverty Reduction Strategy Paper (PRSP). This is intended to ensure that PSI-supported programs are consistent with a comprehensive framework for macroeconomic, structural and social policies to foster growth and reduce poverty. Members' performance under a PSI is normally reviewed semi-annually, irrespective of the status of the program (see Public Information Notice No. 05/145).

"The Cape Verde authorities' well-crafted program under the PSI is guided by the need to support macroeconomic stability and the exchange rate peg, reduce domestic debt, increase foreign reserves, and create fiscal space to accommodate the expected decline in concessional external financing as the country graduates from LDC status.

"Cape Verde continues to demonstrate a strong economic performance, and the authorities are to be commended for their prudent macroeconomic management in recent years. Growth is being sustained, bolstered by significant increases in foreign direct investment, especially in the tourism sector. Reflecting this, unemployment and poverty rates are falling. Although inflation has increased in recent months, this largely reflects poor rainfall, which temporarily drove up food prices. Underlying inflation pressures remain moderate.

"Fiscal consolidation and the build-up of official reserves have proceeded faster than program expectations. The targets for both domestic debt and official reserves initially set for 2009 are likely to be reached in 2008.While the authorities have made progress in preventing an accumulation of central government arrears, challenges remain in the areas of financial sector regulation and supervision, public financial management, and energy sector reform.

"It is important to strengthen financial sector regulation and supervision. In that regard, the authorities' plans to establish a financial intelligence unit and strengthen the framework to combat money-laundering and the financing of terrorism in 2008 are welcome.

"Progress is being made in strengthening public sector financial management. Weaknesses in data reporting understated the deviation with respect to the extent of net domestic borrowing. Since the excess borrowing had little effect on the economic outturn, and has now been unwound, and as measures have been taken to improve budget execution and monitoring, the Board decided to maintain a positive assessment of Cape Verde's past program performance under the PSI.

"Strengthening the energy sector will be critical for enhancing growth and poverty reduction and limiting fiscal risk. In that regard, it is important that the authorities implement rapidly their plans for a comprehensive overhaul of the energy sector, including establishing a new base utility tariff structure and continuously applying the fuel and utility price adjustment mechanisms. This would depoliticize price setting, safeguard the budget, and give companies in the energy sector incentives for investment and efficiency gains," Mr. Portugal said.